SMEs signalled a more bullish outlook in the first quarter of 2016, with almost half expecting sales to increase in the months ahead, according to new research.
The SME Confidence Tracker from Bibby Financial Services shows growth expectations rose by 12 percentage points compared with Q4 2015, while the number of small firms expecting sales to decline fell by over half from 17 per cent to eight per cent.
Forty-eight per cent of businesses expected to see sales increase in the coming three months, up from 36 per cent in Q4.
SMEs were also upbeat about investment, with three-quarters putting money into new office equipment, IT and machinery.
Looking ahead to second quarter of 2016, firms indicated that investment will focus on recruitment and technology. Businesses plan to invest an average of £43,700 in Q2.
Yet despite the positive outlook, there were lingering concerns over the UK's economic environment. More than a quarter - 26 per cent - of firms said this is the main reason holding back investment.
SMEs cited increased competition, red tape, regulation and rising costs as their top challenges.
David Postings, global chief executive of Bibby Financial Services, said: " Despite the uncertainties of the upcoming EU referendum and a muted outlook for the UK economy, small business owners started the year in an unexpectedly bullish manner displaying more confidence than in the second half of 2015.
"Having made business-critical capex decisions and invested in the building blocks of business in 2015, SMEs are looking to position themselves for growth in 2016. However, we aren't out of the woods yet as SMEs still don't believe in the UK growth story and optimism remains far below 2014 levels.
"We have had three hugely impactful political debates in as many years with the Scottish referendum, General Election and forthcoming EU referendum.
"Add to this changes such as the National Living Wage and pension auto-enrolment, it's clear that SMEs crave stability and would benefit from a more simplified operating environment.
"The Budget nibbled at the edges of SMEs' challenges but much more can be done to get businesses moving in 2016. This should include rebalancing the North-South divide by offering tax breaks to redevelop brownfield sites rather than building on greenbelt farmland."